Pricing Policies and Decisions

Pricing Policies And Decisions
By: CA Dr. Arjun Lal Saini
Clearing the Ground

Following pertinent prepositions will facilitate our discussion on pricing: Pricing is a crucail decision making issue since this can make or mar an enterprise. Pricing should be considered as an intergral part of the marketing mix management, not divorced from the rest of the Ps. Price, cost and volume are intricately inter-related with each other and all these affect profit.
Pricing based marketing considerations

Often, marketing considerations tend to dominate over others in determining prices of products or services. On that count, there could be reversal of marketing-based pricing approach. Most important of these are briefly discussed below: High price Going rate pricing Sealed bid pricing Geographical pricing Uniform-delivered price system for handling transportation costs under which all buyers are quoted with the same price, including transportation expenses. FOB (free on board) plant or FOB origin: Price quotation that does not include shipping charges. Buyer pays all freight charges to transport the product from the manufacturer. Zone pricing system for handling transportation costs under which the market is divided into geographic regions and a different price is set in each region. Discount pricing Discriminatory pricing Penetration pricing strategy: involves the use of a relatively low entry price as compared with competitive offerings; based on the theory that this initial low price will help secure market acceptance .
Pricing based on cost consideration

The methods and techniques discussed below are essentially cost-based and would range from the conventional to the more sophisticated approaches. The discussions here are not aimed at specific types of products and markets. 1. Full cost Pricing This appears to be most conventional and popular method of pricing, under which the final price of a product is determined after adding some mark-up to the full cost or total cost of the product. The indirect taxes and duties, forwarding expenses should be added to the price. The full cost recovery price represents the desired minimum long-run price.
2. Conversion cost method Proponents of the conversion cost method of pricing maintain that profit should be based only on the value added by manufacturing i.e. cost of production less material or through-put costs. E.g. It is used in Printing industry and casting foundry.
Continued.
3. Marginal cost pricing: Marginal(Variable) costs are actually costs that can be directly associated with a particular product. The out-of-pocket recovery price i.e. total variable cost per unit is the minimum price below which a cash loss will be sustained.
Marginal Cost
= Direct Material + Variable Overhead
Price of a Product/service = Marginal cost + Contribution (Fixed quantum) Where, Contribution = Sales Marginal cost
Continued.
4. Return on Investment (ROI) pricing: ROI is the most important yardstick in measuring business efficiency. ROIbased pricing is of particular importance in multi-product firms where varying capital investments are required for different product. A formula for establishing a sales price which will yield a desired ROI is: P = (F + V.Sv + R.Fc) / Sv 1 R.Wc P = Selling price per annum F = Fixed cost per annum V = Variable cost per unit Fc = Capital investment in fixed assets Wc = Working capital Sv = Annual sales volume in units R = target rate of return on capital employed
Special Pricing Problems

1. Price discrimination Price discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs when the same price is charged to customers which have different supply costs. Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information.
2. Pricing under recession: Pricing during an economic downturn or recession is tricky. Too often, companies simply cut prices to attract more sales. The right pricing, however, can help a company compete and even thrive during difficult economic times.
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Joint product pricing Pricing for joint products is a little more complex that pricing for a single product. To begin with there are two demand curves. The characteristics of each demand curve could be different. Demand for one product could be greater than for the other product. Consumers of one product could be more price elastic than the consumers of the other product (and therefore more sensitive to changes in the product's price). Spare Parts Pricing It is almost a general practice in industrial marketing to make up profit by selling spare of an equipment at very high prices. Export Pricing
In general, export markets are highly competitive. The basic strategy for pricing will depend on the purpose of export.
Resale price maintenance

Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market), the manufacturer will stop doing business with it.
Resale price maintenance prevents resellers from competing too fiercely on price, especially with regard to fungible goods. Otherwise, resellers worry it could drive down profits for themselves as well as the manufacturer.
Conclusion
Pricing today is perhaps the most baffling problem modern management has to face. The problem has grown in magnitude and complexity recently because of quite a few external factors, mostly uncontrollable from the enterprise point of view. Such factors, to name but a few, are steady transition from sellers market to buyers market, government price regulations and price change and recent inflationary trends.

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Pricing Policies and Decisions

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Pricing Policies And Decisions

By: CA Dr. Arjun Lal Saini

Clearing the Ground

Pricing based marketing considerations

Pricing based on cost consideration

= Direct Material + Variable Overhead

Special Pricing Problems

Resale price maintenance

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